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The impact of China's entrance to the WTO on neighboring east Asian economies
China Economic Review 11 (2000) 419 ± 422
The impact of China's entrance to the WTO on neighboring east Asian economies Young-Rok CHEONG* Graduate School of International Studies, Yonsei University, 134 Shinchon-dong, Sodaemoon-ku, Seoul, 120-749, South Korea
China's WTO membership accession will complete the process of fully returning China back to the international arena, as it once made its political return through its UN membership in 1972. The accession also symbolizes the United States' full recognition of China as a ``constructive strategic cooperation partner,'' despite the post-Cold War tensions that still remain. China already enjoys most of the privileges given by the WTO, such as MFN status, as well as numerous bilateral agreements. As such, China's accession to the WTO will produce only marginal economic benefits in the short run. It will, however, have several longterm regional and global implications for such issues as the intraregional division of labor, and policy coordination, formulation of a Chinese development model, and evolution of regional economic integration arrangements. This short essay will in essence address the prospective effects of the abovementioned issues in the so-called Northeast Asia Region (NEAR), a region that includes China, the Korean peninsula, and Japan. In addition, numerous issues concerning Greater China will also be touched upon. Global economies can be categorized into three groups from an Asian perspective: (1) the leading group including the USA, Japan, and EU, (2) Korea, Taiwan, Hong Kong, and Singapore; and (3) China, Southeast Asia, and North Korea. It is relevant to note that NEAR encompasses first-, second-, and third-tier economies, with capital and technology flowing from the leading group to both the second- and third-tier economies. There is also flow of capital and technology from the second tier to the third. Most pronouncedly, the second-tier economies invest in third-tier economies, not to buy back, but to re-export to a third market of extraregional economies in the USA, EU, and Japan. The first-tier economies invest in China to capture new potential markets and to transact buy-backs at the cheapest prices. Under this basic scheme of global division of labor, China's WTO accession seems to offer no further threat to the crowding out of other Asian economies, or to its emergence as a boomerang. In the past, China has had a positive influence on regional and global economic * Tel.: +82-2-2123-4183; fax: +82-2-312-4645. E-mail address: [email protected] (Y.- R. Cheong). 1043-951X/01/$ ± see front matter D 2001 Elsevier Science Inc. All rights reserved. PII: S 1 0 4 3 - 9 5 1 X ( 0 1 ) 0 0 0 3 1 - 1
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Y.-R. Cheong / China Economic Review 11 (2000) 419±422
cooperation and development. China replaced the so-called four Newly Industrialized Economies in many exporting industries. This has not crowded out of those economies. Rather, it has led to a deeper and more intensive horizontal division of labor among them. For example, Taiwan was successful in prolonging the product life cycle of declining export industries by opportunely shifting facilities to China. In addition, Hong Kong was also a key beneficiary of intensive economic integration with China. In the 1990s, Taiwan incurred huge trade surpluses with China, while Hong Kong incurred large deficits. This illustrates the triangular economic cooperation among first-, second-, and third-tier economies suggested above. The aggregate trade surplus of China, Taiwan, and Hong Kong with the United States has been relatively stable, although its composition has shown a dramatic change as China has emerged as the dominant player. In the NEAR, China, Korea, and Japan have shown mutually complementary rather than conflicting (competing) features. Japan led both China and Korea and provided capital as well as a market for exports. Korea was perceived as China's benchmark for development since Korea had just gone through the development path upon which China was just embarking. In corporate governance, for example, Korean chaebol (conglomerate) form was taken as a model for Chinese SOEs reform, although this turned out to be a bad idea, given the apparent causes of the Asian economic crisis. Some Koreans initially expressed mixed sentiments about China's open-door policy. Initially, major concerns were expressed by farmers and industrialists specializing in cheap labor. However, more than two decades after China opened its markets, Koreans have adjusted, although not without great agony among some classes and sectors. More importantly, China's WTO accession will encourage market opening in the neighboring countries. Most conspicuous will be the dynamism of Japanese cross border investments in the intra-NEAR economies. Under China's WTO nonmembership status, Japan, although it has the capacity to invest heavily in China, has been a reluctant participant in contrast to other developed economies. Nevertheless, following Deng's famous trip to Southern China in 1992, Japan started to accelerate investment to the Chinese market. This trend will speed up when China enters the WTO, resulting in intensive intraregional integration. Japan will also open her market more to intraregional members in the process of reshaping of the intraregional division of labor. The accession will bring increased pressure on the Democratic People's Republic of Korea (DPRK) to open its markets. Although the DPRK entered the UN in 1991, it has been very slow to implement further reforms, in effect refuting the prediction that DPRK would copy the Chinese model. Remember that China proceeded with her open-door policy only after 6 years after obtaining UN membership. In this respect, the recent summit dialogue between the two Kims of the Koreas is welcomed, and may be expected to work positively toward Korean unification. China's WTO accession will lead to enhanced policy coordination among intraregional economies. China's emergence accelerated scrapping of marginal industries in neighboring economies. Korea was a leading exporter of footwear in the 1980s recording a peak export of US$4.3 billion in 1990. Chinese exports of footwear in 1999 amounted to US$ 8.8 billion, while that of Korea was less than US$1.0 billion. Many production facilities moved from Korea to China from the early 1990s on. In other labor-intensive industries, the situation is similar to footwear. In selecting strategic industries, each government must
Y.-R. Cheong / China Economic Review 11 (2000) 419±422
421
consider neighboring countries in order to avoid conflict and over investment. This kind of coordination can follow from cooperation among various industrial associations in the region. In the midst of Asian economic crisis, there was even consideration given to the formation of a regional emergency foreign exchange reserve. These policy coordinations, implicit or explicit, will be inevitably increased. The ultimate impacts of China's WTO membership will depend on to what extent China contribute to the expansion of demand, domestically, regionally, and globally. The typical Asian Development model has been blamed as being too mercantilistic and emphasizing exports over domestic consumption. China, as a dominant supplier of goods and services, can thus come into conflict with other regional economies. Under WTO membership, China will be expected to open and provide more of her markets to foreign countries. This is the most essential and significant part of Chinese WTO accession. Breakdown of the Cold War rendered it possible to shift many production facilities from military to civilian uses. Globalization also led to a drastic industrial restructuring. Massive cross-border merges and acquisitions are seen in the automobile industry. Telecommunication is another expansionary industry. Chinese domestic market expansion has eased the pressures of global market saturation in many industries since the establishment of its open-door policy. Since then, most of the 500 largest MNCs opened representative offices or production lines in China. Intraregionally, several leading companies have moved their headquarters to China. This, in return, allowed China to exercise monopsonistic power in the global market resulting in faster than expected buildup of her production capacity. China's recent Inner Land Development Project, in this respect, is hoped to work as important momentum by absorbing mass investments of the world. China's WTO accession, in the long run, will lead to regional economic integration similar to the EU or NAFTA. Asian economies were less suited to applications of the ``gravity model.'' Most Asian economies exported to both North American and European markets. The political setting of the Cold War inhibited intensive economic integration intraregionally in the NEAR. There has also been a long-standing and deep-rooted rivalry between China and Japan. China's WTO accession will rectify these artificial market distortions. Judging from the evolution of EU and NAFTA, it is crucial to have a sufficiently large market size, high intraregional economic cohesion, and economic and political independence from other regions. The Asian market is still small in size relative to its population size. NEAR, for example, makes up only 19.4% of the global economy compared to the EU (30.1%) or NAFTA (28.7%). Per capita income of NEAR is also far behind that of the EU and NAFTA. On the other hand, China, as a possible core of any regional agglomeration, is enjoying her freedom of independence politically. Dynamically, active intraregional investments will enlarge both market size and the intensity of economic integration. This is forecast on the basis of a high growth rate of potential members of NEAR and rapid increase in intraregional trade dependency ratio from 13.0% in 1990 to 17.4% in 1998. Conjecturing from the fact that EU and NAFTA account for 65% and 45% of trade intraregionally, NEAR still seems to need at least a couple of more decades before it reaches an intraregional trade dependency ratio over 35%. Past Chinese economic development was strongly supported by the pan-Chinese circle. Transaction cost theory well explains this phenomena. Ethnicity and other nonmarket
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Y.-R. Cheong / China Economic Review 11 (2000) 419±422
elements give advantages to Hong Kong and Taiwan businessmen with significant language and social advantages over other economies. Singapore also contributed significantly to the fast pace of Chinese economic development. Lee Kuan-Yew, the founding father of contemporary Singapore, is well known as a key supporter and advisor in the formulation of Dengism. This division of labor will continue. Since Hong Kong and Taiwan preempted the market, they will continue to enjoy the advantages of market access even after Chinese WTO accession. The intensive economic integration of China, Taiwan, and Hong Kong will work positively toward ultimate Chinese political unification. Traditionally, Shanghai has had a significant role in the Chinese economy. Currently, the Jiang-Zhu leadership's power rests on a Shanghai base. Also, many Hong Kong business leaders have deep roots in the Shanghai area. Shanghai will become even more important in the future, given that in 1997, sovereignty over Hong Kong was returned back to China. Judging from past experience, however, China will not pursue active and explicit regionalism since it would be more profitable in the short and medium term to seek to be an active participant in the state of the art scheme rather than seek a new goal of regional power. China will seek globalism at least until the mid 21st century based on the three steps of modernizing of China, ``san bu zou,'' by Deng Xiaoping. Loose integration of overseas Chinese organizations will also continue to have a positive role for further economic development in China. My concluding remarks are on the possible shape of the new international economic order in the long run. Asian economies, especially in the NEAR, suffered many severe distortions due to political and ideological conflicts. Chinese economic dynamism will change the area exactly as the EU and NAFTA did in Europe and in North America. As such, the area will become another pole, composing one of the three legs of the world, which was glorified in old Asian Society for maintaining and keeping stability and balance. Regardless of whether this division is optimal or not, the world economy is like to be divided among the three; EU, NAFTA, and Asia's NEAR backed up by the pan-China region. The contemporary world is called the Age of the Internet and On-line network. In the case of China, overseas Chinese networks will also work as an off-line network to make up for that lacking on-line. Then, China, having more than three regional cards±that of the NEAR, Southern China connected with Hong Kong and Taiwan, and Southeast Asian overseas Chinese ± will maximize advantages as the center of all of these three areas. Ultimately, these fragmented economic regions will evolve into an Asian economic bloc, most probably in the mid-21st century.
The impact of China's entrance to the WTO on neighboring east Asian economies Young-Rok CHEONG* Graduate School of International Studies, Yonsei University, 134 Shinchon-dong, Sodaemoon-ku, Seoul, 120-749, South Korea
China's WTO membership accession will complete the process of fully returning China back to the international arena, as it once made its political return through its UN membership in 1972. The accession also symbolizes the United States' full recognition of China as a ``constructive strategic cooperation partner,'' despite the post-Cold War tensions that still remain. China already enjoys most of the privileges given by the WTO, such as MFN status, as well as numerous bilateral agreements. As such, China's accession to the WTO will produce only marginal economic benefits in the short run. It will, however, have several longterm regional and global implications for such issues as the intraregional division of labor, and policy coordination, formulation of a Chinese development model, and evolution of regional economic integration arrangements. This short essay will in essence address the prospective effects of the abovementioned issues in the so-called Northeast Asia Region (NEAR), a region that includes China, the Korean peninsula, and Japan. In addition, numerous issues concerning Greater China will also be touched upon. Global economies can be categorized into three groups from an Asian perspective: (1) the leading group including the USA, Japan, and EU, (2) Korea, Taiwan, Hong Kong, and Singapore; and (3) China, Southeast Asia, and North Korea. It is relevant to note that NEAR encompasses first-, second-, and third-tier economies, with capital and technology flowing from the leading group to both the second- and third-tier economies. There is also flow of capital and technology from the second tier to the third. Most pronouncedly, the second-tier economies invest in third-tier economies, not to buy back, but to re-export to a third market of extraregional economies in the USA, EU, and Japan. The first-tier economies invest in China to capture new potential markets and to transact buy-backs at the cheapest prices. Under this basic scheme of global division of labor, China's WTO accession seems to offer no further threat to the crowding out of other Asian economies, or to its emergence as a boomerang. In the past, China has had a positive influence on regional and global economic * Tel.: +82-2-2123-4183; fax: +82-2-312-4645. E-mail address: [email protected] (Y.- R. Cheong). 1043-951X/01/$ ± see front matter D 2001 Elsevier Science Inc. All rights reserved. PII: S 1 0 4 3 - 9 5 1 X ( 0 1 ) 0 0 0 3 1 - 1
420
Y.-R. Cheong / China Economic Review 11 (2000) 419±422
cooperation and development. China replaced the so-called four Newly Industrialized Economies in many exporting industries. This has not crowded out of those economies. Rather, it has led to a deeper and more intensive horizontal division of labor among them. For example, Taiwan was successful in prolonging the product life cycle of declining export industries by opportunely shifting facilities to China. In addition, Hong Kong was also a key beneficiary of intensive economic integration with China. In the 1990s, Taiwan incurred huge trade surpluses with China, while Hong Kong incurred large deficits. This illustrates the triangular economic cooperation among first-, second-, and third-tier economies suggested above. The aggregate trade surplus of China, Taiwan, and Hong Kong with the United States has been relatively stable, although its composition has shown a dramatic change as China has emerged as the dominant player. In the NEAR, China, Korea, and Japan have shown mutually complementary rather than conflicting (competing) features. Japan led both China and Korea and provided capital as well as a market for exports. Korea was perceived as China's benchmark for development since Korea had just gone through the development path upon which China was just embarking. In corporate governance, for example, Korean chaebol (conglomerate) form was taken as a model for Chinese SOEs reform, although this turned out to be a bad idea, given the apparent causes of the Asian economic crisis. Some Koreans initially expressed mixed sentiments about China's open-door policy. Initially, major concerns were expressed by farmers and industrialists specializing in cheap labor. However, more than two decades after China opened its markets, Koreans have adjusted, although not without great agony among some classes and sectors. More importantly, China's WTO accession will encourage market opening in the neighboring countries. Most conspicuous will be the dynamism of Japanese cross border investments in the intra-NEAR economies. Under China's WTO nonmembership status, Japan, although it has the capacity to invest heavily in China, has been a reluctant participant in contrast to other developed economies. Nevertheless, following Deng's famous trip to Southern China in 1992, Japan started to accelerate investment to the Chinese market. This trend will speed up when China enters the WTO, resulting in intensive intraregional integration. Japan will also open her market more to intraregional members in the process of reshaping of the intraregional division of labor. The accession will bring increased pressure on the Democratic People's Republic of Korea (DPRK) to open its markets. Although the DPRK entered the UN in 1991, it has been very slow to implement further reforms, in effect refuting the prediction that DPRK would copy the Chinese model. Remember that China proceeded with her open-door policy only after 6 years after obtaining UN membership. In this respect, the recent summit dialogue between the two Kims of the Koreas is welcomed, and may be expected to work positively toward Korean unification. China's WTO accession will lead to enhanced policy coordination among intraregional economies. China's emergence accelerated scrapping of marginal industries in neighboring economies. Korea was a leading exporter of footwear in the 1980s recording a peak export of US$4.3 billion in 1990. Chinese exports of footwear in 1999 amounted to US$ 8.8 billion, while that of Korea was less than US$1.0 billion. Many production facilities moved from Korea to China from the early 1990s on. In other labor-intensive industries, the situation is similar to footwear. In selecting strategic industries, each government must
Y.-R. Cheong / China Economic Review 11 (2000) 419±422
421
consider neighboring countries in order to avoid conflict and over investment. This kind of coordination can follow from cooperation among various industrial associations in the region. In the midst of Asian economic crisis, there was even consideration given to the formation of a regional emergency foreign exchange reserve. These policy coordinations, implicit or explicit, will be inevitably increased. The ultimate impacts of China's WTO membership will depend on to what extent China contribute to the expansion of demand, domestically, regionally, and globally. The typical Asian Development model has been blamed as being too mercantilistic and emphasizing exports over domestic consumption. China, as a dominant supplier of goods and services, can thus come into conflict with other regional economies. Under WTO membership, China will be expected to open and provide more of her markets to foreign countries. This is the most essential and significant part of Chinese WTO accession. Breakdown of the Cold War rendered it possible to shift many production facilities from military to civilian uses. Globalization also led to a drastic industrial restructuring. Massive cross-border merges and acquisitions are seen in the automobile industry. Telecommunication is another expansionary industry. Chinese domestic market expansion has eased the pressures of global market saturation in many industries since the establishment of its open-door policy. Since then, most of the 500 largest MNCs opened representative offices or production lines in China. Intraregionally, several leading companies have moved their headquarters to China. This, in return, allowed China to exercise monopsonistic power in the global market resulting in faster than expected buildup of her production capacity. China's recent Inner Land Development Project, in this respect, is hoped to work as important momentum by absorbing mass investments of the world. China's WTO accession, in the long run, will lead to regional economic integration similar to the EU or NAFTA. Asian economies were less suited to applications of the ``gravity model.'' Most Asian economies exported to both North American and European markets. The political setting of the Cold War inhibited intensive economic integration intraregionally in the NEAR. There has also been a long-standing and deep-rooted rivalry between China and Japan. China's WTO accession will rectify these artificial market distortions. Judging from the evolution of EU and NAFTA, it is crucial to have a sufficiently large market size, high intraregional economic cohesion, and economic and political independence from other regions. The Asian market is still small in size relative to its population size. NEAR, for example, makes up only 19.4% of the global economy compared to the EU (30.1%) or NAFTA (28.7%). Per capita income of NEAR is also far behind that of the EU and NAFTA. On the other hand, China, as a possible core of any regional agglomeration, is enjoying her freedom of independence politically. Dynamically, active intraregional investments will enlarge both market size and the intensity of economic integration. This is forecast on the basis of a high growth rate of potential members of NEAR and rapid increase in intraregional trade dependency ratio from 13.0% in 1990 to 17.4% in 1998. Conjecturing from the fact that EU and NAFTA account for 65% and 45% of trade intraregionally, NEAR still seems to need at least a couple of more decades before it reaches an intraregional trade dependency ratio over 35%. Past Chinese economic development was strongly supported by the pan-Chinese circle. Transaction cost theory well explains this phenomena. Ethnicity and other nonmarket
422
Y.-R. Cheong / China Economic Review 11 (2000) 419±422
elements give advantages to Hong Kong and Taiwan businessmen with significant language and social advantages over other economies. Singapore also contributed significantly to the fast pace of Chinese economic development. Lee Kuan-Yew, the founding father of contemporary Singapore, is well known as a key supporter and advisor in the formulation of Dengism. This division of labor will continue. Since Hong Kong and Taiwan preempted the market, they will continue to enjoy the advantages of market access even after Chinese WTO accession. The intensive economic integration of China, Taiwan, and Hong Kong will work positively toward ultimate Chinese political unification. Traditionally, Shanghai has had a significant role in the Chinese economy. Currently, the Jiang-Zhu leadership's power rests on a Shanghai base. Also, many Hong Kong business leaders have deep roots in the Shanghai area. Shanghai will become even more important in the future, given that in 1997, sovereignty over Hong Kong was returned back to China. Judging from past experience, however, China will not pursue active and explicit regionalism since it would be more profitable in the short and medium term to seek to be an active participant in the state of the art scheme rather than seek a new goal of regional power. China will seek globalism at least until the mid 21st century based on the three steps of modernizing of China, ``san bu zou,'' by Deng Xiaoping. Loose integration of overseas Chinese organizations will also continue to have a positive role for further economic development in China. My concluding remarks are on the possible shape of the new international economic order in the long run. Asian economies, especially in the NEAR, suffered many severe distortions due to political and ideological conflicts. Chinese economic dynamism will change the area exactly as the EU and NAFTA did in Europe and in North America. As such, the area will become another pole, composing one of the three legs of the world, which was glorified in old Asian Society for maintaining and keeping stability and balance. Regardless of whether this division is optimal or not, the world economy is like to be divided among the three; EU, NAFTA, and Asia's NEAR backed up by the pan-China region. The contemporary world is called the Age of the Internet and On-line network. In the case of China, overseas Chinese networks will also work as an off-line network to make up for that lacking on-line. Then, China, having more than three regional cards±that of the NEAR, Southern China connected with Hong Kong and Taiwan, and Southeast Asian overseas Chinese ± will maximize advantages as the center of all of these three areas. Ultimately, these fragmented economic regions will evolve into an Asian economic bloc, most probably in the mid-21st century.